This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

As President-Elect Obama has honestly and accurately told us, we stand at the edge of a precipice. We have a few months—a very few—to get economic recovery right.

If we don’t, every one of us will pay an extraordinary price. Our nation may never recover its position of economic, industrial and social leadership, let alone its former glory.

Our entire 233-year history as an upstart nation based on new social dynamics is at stake. If we suffer a “lost decade” like the Japanese in the 1990s, when we emerge the world will have passed us by.

In addressing this unprecedented challenge, we face a handicap as great as our difficulties. The vast majority of our leaders were trained as lawyers.

Don’t get me wrong. Lawyers can be useful in reconciling differences and achieving justice. Many of our most effective and admirable Founders were lawyers.

But lawyers have an Achilles heel. They are not quantitative thinkers. They are list makers. If lawyers do a thing—whether win a lawsuit or help pass legislation—they check it off their list. Then they claim bragging rights about it.

If you doubt this, think about health care. Half a century after Harry Truman declared health care a basic human right, we have a patchwork system that is now in tatters. Why? Because the lawyers who lead us passed little bits and pieces that don’t cohere and checked the still unsolved problem off their lists.

Unlike economists, business people, accountants, engineers and scientists, lawyers don’t worry about numbers. They don’t think about whether they’ve done enough of anything. They just think about whether they’ve done it at all. They are simply not trained to understand how numbers matter.

But right now numbers matter for two reasons. First, our problems are economic, and economics is all about numbers. If we fall short, we fail, despite good intentions, and despite checking every item off our list.

Second, our problems are problems of credit. We have built our economy on borrowing from China and Japan. We need their continued credit to dig ourselves out of our economic hole.

But lawyers don’t run those nations. Their leaders cut their teeth in industry, economics and engineering. They are technocrats, and they know numbers. If we don’t show them that we do, too, they won’t lend us any more money, except perhaps at exorbitant rates. Already they are getting restive.

So as we look towards economic recovery, we all have to understand that numbers matter. If we take our eyes and minds off the numbers and heed the usual political razzle-dazzle, we will fail.

With that key point in mind, here are five make-or-break quantitative principles that any economic recovery plan must obey. If it doesn’t, it will fail.

1. Make it big. The outgoing administration has already requested, committed, or spent nearly 3.5 trillion dollars. Here’s the accounting, in billions of dollars:

In addition, the federal government has taken on over three trillion dollars worth of guarantees, as follows:

Freddie Mac and Fannie Mae Conservatorship and Guarantee

100

Guarantee of Mitsubishi investment in Morgan Stanley

9

FDIC Guarantee of GE Capital Senior Debt

139

Money-market fund stabilization program

3,000

TOTAL

3,248

Not all this money is spent, yet. The Commercial Paper Funding Facility is essentially a revolving fund, since commercial paper represents very short-term loans, typically for days or weeks. Other parts, like the purchases of and loans for securities backed by mortgages and other assets ($600 billion + $220 billion = $820 billion), are completely opaque. I could find no public accounting for how much, if any, has been spent so far.

As for the $700 billion of TARP funds, only the first half has been spent. But the current Administration can have the other half on request unless Congress countermands the request, and it reportedly intends to make the request before it leaves office. The promised auto industry bailout is part of that second half.

The point is not that all this money is gone. It isn’t. The point is that these gigantic sums reflect a rough estimate of the total size of the problem. If you add the amounts allotted and guaranteed together, the total is $ 6.674 trillion dollars. The fraction that we’ve spent so far hasn’t even moved the needle; we are still in economic free fall.

Nobel-Prize-winning economist Paul Krugman provided a more conservative back-of-the-envelope estimate in a recent New York Times column. Based on the total size of the economy and projections of lost production, he guesstimated the size of the problem as $2.1 trillion. Apparently that estimate was of lost industrial production only, not problems in finance, to which we’ve already committed the $6.674 trillion (with little to show for it besides assurances that things could be worse).

What lessons can we take from these rough numbers? First, there’s a lot of uncertainty. The relevant unit today is trillions, not billions. Anything less represents unavoidable ignorance in a complex, rapidly changing situation, or simple rounding error.

Second, the “real,” or industrial economy is different from the economy of banking and finance about which Paulson & Company have been obsessing for several months. Both sectors are hemorrhaging jobs, but we haven’t begun to address the real economy yet. The auto-industry bailout, which is part of the so-far-uncommitted second $350 billion of TARP funds, is just the first tiny installment in rescuing our real economy.

The third and most important lesson from these numbers is that the size of the package under discussion by the Obama transition team is much too small. Less than $800 billion is not going to solve a problem whose size is somewhere between $2.1 trillion and $ 6.8 trillion. We’re trying to drive from Chicago to Washington, D.C. on a few gallons of gas, and we’re likely to freeze in the snow.

2. Invest, don’t spend. We’ve been stupid for the last decade or more. We’ve wasted the kind of money that most societies never see. We can’t continue to spend stupidly because our creditors won’t finance further waste. We’ve got to spend smart. That means investing.

Why is investing so important? Because every dollar invested does multiple duty.

Let’s say you invest in building (or rebuilding) a school. Some of the money goes to the laborers who do the work. Some of them would not have jobs otherwise. They spend their pay on food, clothing, transportation and other necessities. Some of their expenditures go to people who supply those items, creating more jobs and providing more money for food, clothing, transportation and other necessities.

Some of the original money also goes for supplies to build the school—things like bricks, mortar, wire, and paint. It pays the people who make those supplies and transport them to the worksite. Some of them would not have jobs otherwise. Like the workers who build the school, they spend their pay on food, clothing, transportation, and other necessities.

But that’s not all. Those workers who would not otherwise have jobs might have defaulted on their house payments and suffered foreclosure. Giving them jobs not only saves their families from hardship and misery; it also helps save their neighborhoods, because foreclosures reduce property values and destroy neighborhoods. So the investment not only supports multiple layers of workers. By supporting their neighborhoods and property values in them, it aids the general economy.

And that’s still not all. After all the money is spent and the workers go on to other jobs, you still have something of value: the school. With it, children get a better education and go on to better jobs that create more wealth.

This “investment” effect is even easier to see with things like the energy grid, automated medical records, or modernization of our air traffic control system. Long after the work is done and the original money paid, society still gains by saving money on every kilowatt-hour of electricity, every prescription and medical procedure (with reduced medical errors), and every airplane flight that arrives on time and on a more direct and therefore more fuel-efficient route.

Economists call this multiple duty a “multiplier effect.” It’s hard to quantify, but it’s real. Investing in real things—especially infrastructure—can have an economic effect up to three times the amount invested.

In our current unenviable financial state, with skeptical creditors begrudging their loans and raising their rates, we can’t afford to ignore factors of up to three. Quantitative thinkers like economists, accountants, business people and engineers understand this point instinctively. Lawyers and ideologues will have to be beat over the head to get it.

3. Go for jobs. What is the “economy”? It’s a bunch of people engaged in productive enterprise. Every man and every woman count.

That’s why economists obsess over the unemployment rate. Unemployed people don’t contribute to general economic welfare. Furthermore, we don’t let unproductive people starve, as primitive societies once did. We support them. So not only don’t they produce; the rest of us also have to pay for their upkeep. Therefore keeping everyone productively employed is job one for policy makers.

Investments do that. Tax cuts don’t. Tax cuts allow people who already have jobs to save and spend more. They don’t create jobs.

Even if you accept the discredited “trickle down” theory (that tax cuts for the rich encourage them to invest in businesses that create jobs), it won’t work under current circumstances. President-Elect Obama has promised 95% of his tax cuts to the middle class. They don’t run businesses, and their minuscule tax cuts of $500 to $1,000 won’t create businesses or any jobs. And even the mere 5% of the money that goes to the rich won’t create jobs because no rational person is hiring during this economic free fall. If it ever worked at all, trickle-down theory is on indefinite hold.

The same is true of unemployment insurance. Of course it’s fine to keep unemployed people off the streets and in their homes. But it’s far better to give them new jobs, new hope, and a new future. Investment beats compensation for not working hands down.

4. Keep Republican ideologues on a short leash. Life is full of contradictions. On the one hand, the clearest lesson of our economic meltdown is that unregulated free markets based on trickle-down economics don’t work. The economic theories of the Reagan era are now as thoroughly discredited as last century’s Communism. They are economic fairly tales unsuited for realists, let alone serious quantitative thinkers caught in a difficult bind.

One the other hand, partisanship, name-calling and lack of respect for opposing views (even if stupid!) are partly responsible for our current catastrophe. President-Elect Obama has promised a “new politics” based on mutual respect, listening, collaboration, and compromise.

It’s vital that he deliver on that promise. Our future as a democracy depends on his doing so. So does restoration of our global stature and our self-respect.

So how can we reconcile these two contradictory goals when Republicans insist on tax cuts, perhaps the worst kind of expense under these circumstances?

The answer, I think, is to use lawyers’ aversion to quantitative thinking to our advantage. Give the Republicans their tax cuts. Allow them to take credit for supporting, once again, a discredited, ineffective ideology. Let the lawyers among them put marks on their checklist: “tax cut, check! Done!” Give them as many bragging rights as they have the temerity and stupidity to claim. But keep tax cuts as small as possible.

In this regard we should be as cynical as possible. With how much in tax cuts can we buy how much Republican allegiance or acquiescence for an economic program that might actually work? I trust we can do it for less than $200 billion, but I hope the number will be closer to $100 billion. Remember all those up-to-factor-of-three multipliers that we can’t waste!

5. Make everything quantitatively transparent. We need an official government website with complete, on-line, real-time accountability. It must show every dollar of taxpayers’ money appropriated, guaranteed, allocated, and spent.

For every dollar, it must trace every hand though which it passes, not just to government or government-sponsored entities, but to private contractors and subcontractors as well. Names, addresses (both physical and e-mail) and contact numbers of every private recipient should be on line.

To work at all, any economic recovery program must work fast. If there is to be accountability, accounting also cannot wait. We need real-time, on-line accounting, as the money is allocated and spent. That sort of modern accountability will help the government keep track of its expenses and citizens and competitors keep recipients’ and contractors’ feet to the fire.

Real-time, quantitative accounting will also permit instant assessment and mid-course correction. It will help economists and policy makers see, in real time, what is working and what is not.

Eighty years later, economic historians are still studying the Great Depression and disputing what cured it, partly because of murky or unavailable data. In this computerized Internet age, we owe ourselves better accounting. From a president who built his extraordinary campaign around the Internet, we should expect no less.

Conclusion. We don’t have much time. Conditions for a real recovery plan will never be more favorable. In ten days, the most justly reviled administration in a century—if not ever—will leave office. The people will heave a huge sigh of relief. In its place will come an extraordinary collection of experts, led by a charismatic leader of great skill and strategic vision, with an approval rating hovering near 80% and every political wind at his back.

These favorable conditions won’t last for long, even if a measure of bipartisanship holds. There will never be a better time to turn this country around.

So strike hard, strike big, and strike boldly. Don’t listen to the nay-sayers. And remember: the outgoing fools who created this mess have already spent or committed close to $7 trillion on just one part of the problem, banking and finance. They have little credibility to say “think small.”

Credit. For most of the numbers in Part 1, I’m indebted to the Sonnenschein Financial Crisis Special Situations Group, which has provided a convenient on-line summary of federal recovery expenses and commitments. That summary is in inverse chronological order, and not every entry is quantified. Because of the chronological ordering, there is some overlap, which I’ve tried my best to eliminate, based on my general knowledge. Any errors in my accounting are mine, not Sonnenschein’s.

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About Me

This blog reflects a quarter century of study and forty years of careers in science/engineering (7 years), law practice (8 years) and law teaching (25 years). A short bio and legal publication list appear here. My pre-retirement 2010 CV appears here.
As I get older, I find myself thinking more like an engineer and less like a lawyer or law professor. Our “advocacy” professions—law, politics, public relations and advertising—train people to take a predetermined position and support it against all opposition. That’s not the best way to make things work—which is what engineers do.
What gets me up in the morning is figuring out how things work and how to make them work better, whether they be vehicles, energy systems, governments or nations.
This post explains my respect for math and why you’ll find lots of tables and a few graphs and equations on this blog. If you like that way of thinking, this blog is for you.